Reverse Mortgages

BY DONNA G. KLEIN

Donna G. Klein is head of the Health Care Section at McGlinchey Stafford, a PLLC in New Orleans, Louisiana.

If Social Security, pensions, and savings fail to provide enough retirement income, elders may also rely upon the equity in their home. Home equity is the largest unaccessed financial resource for the elderly, and reverse mortgages allow elders to take advantage of this resource.

A reverse mortgage is a non-recourse loan that is secured by the borrower's principal residence. Reverse mortgages are tailored to fit the needs of elderly clients. For instance, elderly people are typically unable to afford the cost and interest associated with additional debt. However, through the reverse mortgage, a borrower may obtain credit with very little expense and without having to satisfy an income requirement.

Although title to the residence remains in the name of the borrower, reverse mortgages attach as a first lien on the residence. The amount of funds available pursuant to reverse mortgages are calculated using formulas analyzing the borrower's age, the proposed schedule of fund distribution, the interest rate, and the equity in the home. The more equity the borrower has in her home, the greater the amount of funds available to her. Funds are distributed to the borrower in one of several ways, including lump sum payments, monthly payments, or a line of credit. The IRS does not consider the advances received to be gross income.

Significantly, complete payoff of the debt is not required until the end of the term, which occurs when the owner sells or vacates his home or, in a minority of situations, on a fixed repayment date. Until the end of the term, no payments are due. This aspect of reverse mortgages satisfies the elderly person's wish to live in his home for his entire life.

Any interest accrued pursuant to reverse mortgages is not deductible until the end of the term. However, because the end of the term cannot be definitively defined, the debt may often grow larger than the value of the residence. Nevertheless, since reverse mortgages are non-recourse loans, the lender is not entitled to receive the deficiency from the borrower. However, if the value of the house at sale is more than the amount of the debt, the borrower's estate is entitled to the excess proceeds.

Reverse mortgages can significantly improve the life of an elderly person. It is beneficial due to its non-recourse nature, the diversity of disbursement alternatives, and the fact that payment is not due until the end of the term. (For more information, see Reverse Mortgages: An Innovative Tool for Elder Law Attorneys by Carolyn H. Sawyer, 26 Stetson L. Rev. 617 (1996).)